First Liens a Growing Problem for Seconds

With the home-equity market growing fast, second-lien holders face increasing anxiety about protecting the lien in the event that a borrower defaults on the first mortgage.

First American Real Estate Information Services has launched LienWatch, a new product designed to help mortgage servicers detect early warning signs that a borrower may default on a second mortgage.

Because first-lien holders take precedence in the event of foreclosure, servicers of second liens are exposed to a much greater risk of loss. Until now, First American said, there has been no way for servicers to receive the early warnings necessary to help manage portfolios and minimize losses.

"One of the biggest problems we have is finding out too late that there was foreclosure action happening to the first lien when we were in second-lien position," said Jason Pinson, vice president of EMC Mortgage Corp., in a First American press release. "With LienWatch, we are proactively tracking the first liens and are now in a position to make better decisions when an action on the first occurs."

Through LienWatch, servicers can know the status of all mortgages associated with a property, including all recorded mortgages for the customer/property, the outstanding mortgage balances, due dates of all mortgages and the estimated value of the property.

LienWatch uses First American's national property and credit database to provide a monitoring and alert service for the second-lien holders, said Reid Lange, vice president and product manager with First American Real Estate Information Services. "The mortgage servicing industry has been looking for this type of solution for a long time, and we now offer the technology that makes it possible."

Mr. Lange told MSN that with new privacy laws in effect, it is often difficult for servicers of junior liens to get information from the servicer of the first mortgage. But if the first mortgage holder forecloses on the loan, that usually wipes out any junior liens.

"You would like to have the opportunity to preserve the second by buying out the first," Mr. Lange said.

In the past, bank holdings of seconds were often so small that they could afford to just write the loans off if something happened to the first. But those days are gone, he said.

The size of the home-equity market, both in aggregate terms and in the size of typical loans, is growing rapidly. The loans often range from $30,000 to $50,000 in size. Last year, second mortgage lending industrywide grew 50%. In the past, servicers of second mortgages typically waited until the junior lien was delinquent before they tried to check on the status of the first mortgage.

"When you start this data chase, you are 90 days down in the process. The foreclosure can take place prior to you making a decision about what you are going to do," Mr. Lange said.

First American's monitoring service searches databases for any recorded document that is actionable. It also monitors credit reports daily to alert lenders about problems with the first mortgage. Reports to the mortgage company also include information about the amount of the first mortgage debt and the property value, helping them add up the encumbrances and determine how much equity is at stake.

The rise of home-equity lines of credit has complicated junior lien management, he said. In many cases, a borrower who has stopped making payment on a first mortgage will continue to make payments on the HELOC, because they know they can keep borrowing if they pay the HELOC bill.

In addition, regulators have started to scrutinize bank holdings of HELOCs due to the growing amount of home-equity debt on bank balance sheets, Mr. Lange noted. This in turn has bankers looking for ways to manage their home-equity holdings more closely.

With revenue of $6.72 billion in 2004, First American has 30,000 employees in about 1,800 offices throughout the United States and abroad.